On June 21, 2018, the Supreme Court issued its highly anticipated opinion in Lucia v. SEC, finding that the manner in which the U.S. Securities and Exchange Commission (SEC) selects its “in-house” administrative law judges (ALJs) violates the Appointments Clause of the Constitution. In a 7-2 decision, the Court held that ALJs are “inferior officers” and must be appointed by the president or head of the agency, rather than hired by SEC staff through the civil service process. The immediate practical impact of the decision requires that petitioner Raymond Lucia be afforded a new hearing before “a properly appointed official.”
In recent years, capitalizing on what some commentators considered a “home court advantage” for enforcement actions, the SEC began favoring administrative proceedings in which agency ALJs serve as adjudicators rather than judicial proceedings in federal court. An ALJ assigned to hear an SEC enforcement action has the power to issue an initial decision containing factual findings, legal conclusions, and appropriate remedies. The Commission is not required to review the ALJ’s decision, and if it declines to review, the ALJ’s “initial” decision is deemed a final action of the Commission. In practice, most ALJ initial decisions become final without any Commission review; for example, 2016 data revealed that 90% of SEC ALJ initial decisions were not reviewed by the Commission.
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